Economic Analysis of Demand and Supply

Demand and Supply

•       The rules of demand and supply are the foundation stones of economics

•       These will be applied to shipping

•       You will be shown how these rules then set the price in each market

If you demand something, then you:

–      want it

–      can afford it

–      have made a definite plan to buy it

The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period, at a particular price.

What determines buying plans?

In pure economic theory:

•       The price of the good

•       The price of related goods

•       Expected future prices

•       Income

•       Population

•       Taste and preferences

Ceteris Paribus

•       This means “holding all other things the same”.

•       To study the effect of price on consumers’ buying plans, we first hold all the other factors the same.

•       This enables us to build a simplified model of the relationship between price and quantity demanded.

The Law of Demand

The quantity of a good demanded per period of time will fall as the price rises, other things being  equal (ceteris paribus)

Transport as derived demand

•       With few exceptions, transport is not demanded for itself

•       The demand for transport is derived from the demand for the goods carried

•       For example:

–      Ferry passengers demand to be somewhere else

–      Shippers send their goods to a market where they can be sold for a higher price

A Change in Demand

•       When any factor that influences buying plans other than the price of the good changes, there is a change in demand

•       When demand increases, the demand curve shifts to the right and the quantity demanded is greater at every price

•       When demand decreases, the demand curve shifts to the left and the quantity demanded is less at every price

A Change in Demand

Demand for Shipping

The key factors of demand are:

Volume of cargo

                                 or

Weight of cargo to be shipped

                                AND

Distance that the cargo is to be moved over a given period of time

The normal measure of demand is tonnes x miles or the tonne mile

Some factors causing a change in demand for shipping services

•       World economic prosperity or recession (income)

•       Demand by people and firms for imported goods and the movement of goods

–      Average length of haul

•       Relative price of imported goods affected by

–      Exchange rates

–      Wages and productivity at home/abroad

•       Politics (expectations)

•       Seasons and the weather

Demand Shocks Causing a Sudden Change in Demand

•       War

•       Sudden oil price rise

•       Closure of Suez canal

•       Rapid economic growth of a large country

•       Flood/drought/hurricanes in production areas

•       Economic crisis

–      Exchange rate shock

–      Sharp recession

Supply

If a firm supplies a good or service then the firm:

–      has the resources and technology to produce it

–      can profit from producing it

–      has made a definite plan to produce and sell it

                The quantity supplied of a good or service is the amount that producers plan to sell at a given time and place

What determines selling plans?

In pure economic theory:

•       The price of the good or service

•       The prices of resources used to produce the good or service

•       The prices of related goods and services

•       Expected future prices

•       The number of suppliers

•       Technology

The Supply Curve

When the price of a good rises, the quantity supplied over a given period of time will also rise (ceteris paribus) 

The Supply of Shipping

•       This is the number of ships times the distance travelled, over a given period of time

•       It varies with the number and size of ships in the world fleet, their speed, and how much time they spend not carrying cargo

–      Waiting for orders

–      Being repaired

–      Waiting for a berth

–      Loading and unloading cargo

Changes in Supply

•       When any factor other than the price of the good or service changes, there is a change in supply

•       When supply increases, the supply curve shifts to the right and the quantity supplied is greater at every price

A Change in Supply

Factors Causing A Change in Supply in Shipping

•       The supply of ships in the world changes slowly

•       It will take at least months, sometimes years to deliver a new ship

•       Demolition is also a slow business

•       At the edges, though, supply can change quickly by:

–      Changes in speed

–      Changes in productivity e.g. time waiting to berth, time in port, time spent in drydock

–      Movement from one market segment to another

The Effect of Price

•       Price is the invisible hand that balances the buying and selling plans of consumers and producers all over the world.

•       The balance is the market equilibrium price at any one moment

Equilibrium Price and Quantity